Charlie Major, owner of Charlie's Cheesecake Works in San Jose., Calif., raised prices slightly when the city increased the minimum wage. He says he saw a 7 percent drop in retail sales after the increase.

Kirk Siegler
/ NPR

Listen

Listening...

/

Originally published on June 30, 2014 9:33 am

It's been a little more than a year since San Jose, Calif., increased the city's minimum wage by $2 per hour, with adjustments for inflation. Now at $10.15 an hour, it's one of the state's highest.

Back in 2012, as voters were debating the wage hike, some in the restaurant and hospitality industry warned that an increase would be bad for the sector. It would deter new businesses from opening, they said, and would cause existing businesses to slash hours for employees.

So how are San Jose's businesses faring today? The answer is, it depends.

The vast majority of the 17,000 minimum wage jobs in the city are in the food service and hospitality sectors. After the wage increase, the Pizza My Heart restaurant raised its prices by about 5 percent.

Just a block from San Jose State University, Pizza My Heart gets heavy foot traffic, with a line out the door on most days. The restaurant does brisk business; about 50 pizzas come out of its brick oven every hour.

Like many business owners in downtown, Chuck Hammers fought the ballot initiative and braced for the worst when the law took effect last March.

"There's that little bit of a panic from a business owner, you know, 'Is the sky going to fall?' " Hammers says. "And you're nervous. It's a 20 percent increase in what's really one of your biggest costs" — labor.

"After looking at it, I kind of stepped back and realized, well, it's gonna happen to everyone," Hammers says. "It's going to be a fair playing field. We just need to increase prices a little bit."

So he did. Slices went up by 25 cents, pies by $1. Sales held steady, and Hammers says customers didn't seem to notice.

Hammers owns 24 Pizza My Heart shops. Only four shops are in San Jose, but he decided to raise everyone's wages at all of his stores. Otherwise, he says, he was worried he'd lose workers at his franchises outside the city, where the minimum wage is lower.

"The employees like it, they're sticking around longer," Hammers says. "We're getting very little turnover now in employees, which is really good."

In fact, Hammers is opening more Pizza My Hearts. He still bristles at the suggestion that he's a booster of raising the minimum wage. But at the same time, Hammers says he understands that it's almost impossible to live on $8 an hour in a city where the average two-bedroom apartment goes for more than $2,000 a month.

A Squeeze For Some Small Businesses

In a strip mall on San Jose's southern city limits, Charlie's Cheesecake Works is a lot smaller than Pizza My Heart. It has only four employees, including owner Charlie Major. Major pays one employee minimum wage and the others slightly more.

Around the time that the wage increase took effect, his sous chef got another job and moved on.

"I did not replace her," Major says. "I decided that, in light of what was going on with the change and stuff, just until we saw how it really played out, I can do the job that she did, so that's what I've done."

Major, like Hammers at Pizza My Heart, also raised his prices, by about 5 percent. Most of his products are sold wholesale to the local Costco and Whole Foods, but at this store, he makes his profits from walk-up customers who come in to buy a cake or a couple of boxes of his popular "cheesecake mini poppers."

Since the law took effect, profits in the store have dropped by 7 percent, Major says — a big enough hit that he has actually shelved plans to expand the space. Now, he's actively thinking about selling or retiring if things don't get better in the next year.

"It hits small business right where it hurts," Major says of the wage increase. "And if you want to encourage small business, it's tough."

Michael Reich, an economist at the University of California, Berkeley who runs the Institute for Research on Labor and Employment, is very interested in what happens when cities and counties raise the minimum wage.

"A lot of employers are afraid about this ahead of time, because they know they can't raise their [prices] when their competitors do not," Reich says. "But here you have a policy that affects all the restaurants simultaneously."

Reich recognizes that it's a little easier for a larger business like Pizza My Heart to absorb a minimum wage increase than a Charlie's Cheesecake Works. Overall, though, he says the city is doing fine.

Reich crunched his latest numbers for restaurants in San Jose and found that, across the board, operating costs rose by about one-quarter of 1 percent in the past year, and prices for customers rose a little under 1 percent, on average.

"The basic story is the sky didn't fall," he says. "San Jose is still doing well."

But Reich says there's one big caveat: San Jose and Silicon Valley are booming. "It's easier to have higher minimum wages in areas that are booming than areas that are falling apart economically," he says.

Then again, Reich points to Albuquerque, N.M., a city with a long-struggling economy. A recent minimum wage hike there appears to have had little effect on businesses so far, he says.

As the wage increases play out in Albuquerque and San Jose, economists like Reich are about to get a lot more data to study. Dozens of cities and counties across the country are now considering, or are poised to pass, minimum wage increases.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, HOST:

This is MORNING EDITION from NPR News. Good morning. I'm Renee Montagne.

DAVID GREENE, HOST:

And I'm David Greene. Seattle recently approved a plan to raise its minimum wage to $15 an hour. It will be phased in over time, in part to allow businesses time to adjust to this. Those businesses might look at San Jose, California for an idea of what to expect. In 2012, voters there approved a $2 hike in the minimum wage with annual adjustments for inflation. The minimum wage in San Jose is now $10.15 an hour. And although it is still a little early to assess the broad economic impact of the increase, NPR's Kirk Siegler visited two businesses to get their perspectives.

KIRK SIEGLER, BYLINE: Both of these businesses we're about to meet are in food service - one big, one small - both dealt with the minimum-wage increase the same way, they passed the costs onto their customers. First, meet Chuck Hammers, owner of Pizza My Heart, on bustling San Carlos Street.

CHUCK HAMMERS: We're in downtown San Jose. We're a half a block from San Jose State - very heavy foot traffic area with lots of students and such.

SIEGLER: Pizza My Heart does a brisk business. There's a line out the door most days. About 50 pizzas come out of this brick oven every hour. Like many business owners in town, Hammers oppose the ballot initiative and was bracing for the worse when the minimum wage law took effect last March.

HAMMERS: There's that little bit of a panic for a business owner, you know, is the sky going to fall, and you're nervous. It's a 20 percent increase in what's really one of your biggest costs.

SIEGLER: That was a 20 percent increase in labor cost for Hammers.

HAMMERS: After looking at it, I kind of stepped back and realized, well, it's going to happen to everyone. It's going to be a fair playing field. We just need to increase prices a little bit.

SIEGLER: So he did. Slices went up by a quarter, pies by a dollar. Sales held steady and Hammers says customers didn't seem to notice. Pizza My Heart is a franchise. Hammers owns 24 of them. Only four are actually here in San Jose, but he decided to raise everyone's wages, across the board, at all his stores. He was worried he might lose some of his workers at his franchises outside the city, where the minimum wage is lower.

HAMMERS: And the employees like it. They're sticking around longer, we're getting very little turnover now in employees, which is really good.

SIEGLER: In fact, Hammers is currently expanding - opening more Pizza My Heart's. He still bristles at the suggestion that he's a booster of raising the minimum wage. But at the same time, Hammers says he understands that it's almost impossible to live on eight bucks an hour in a city where the average two-bedroom apartment goes for more than two grand a month.

CHARLIE MAJOR: Charlie's Cheesecake Works, this is Charlie.

SIEGLER: Charlie's Cheesecake Works sits in a strip mall near San Jose's southern city limit. It's a lot smaller than Pizza My Heart. There are only four employees, including Charlie Major, the owner. He pays one minimum wage, the others slightly more. And around the time that the minimum wage increase took effect, his sous chef got another job and moved on.

MAJOR: I did not replace her. I decided that, you know, in light of what was going on, with the change in stuff, and just until we saw how it really played out. It was, you know, I can do the job that she did. So that's what I've done.

SIEGLER: Like at Pizza My Heart, Charlie Major also raised his prices by about 5 percent. Most of his products are sold whole-sale to the local Costco and Whole Foods. Where he says he makes his profits are walk-up customers at this store - the people who come in to buy cake or a couple boxes of his popular cheesecake, Mini Popper's.

MAJOR: What are we picking up?

UNIDENTIFIED WOMAN: It was 70 poppers, sir

SIEGLER: Profits here in the store have dropped by 7 percent since the law took effect. It's been a big enough hit that Major says he's actually shelved plans to expand the space. And he's actively thinking about selling or retiring if things don't get better in the next year.

MAJOR: It hits small business right where it hurts. And if you want to encourage small business, it's tough.

SIEGLER: So we have two different food businesses - one with four employees, the other with 500 spread across 24 restaurants. Both raise their prices by about 5 percent. One's doing fine, one's hurting a little. I laid this out for UC-Berkeley economist, Michael Reich, he runs the Institute for Research on Labor and Employment, and is very interested in what happens when cities and counties raise the minimum wage.

MICHAEL REICH: Yeah, the basic story is the sky didn't fall. San Jose is still doing well.

SIEGLER: Reich says it's a little easier for a larger business like Pizza My Heart to absorb a minimum wage increase than a Charlie's Cheesecake Works. But he says long-term, things tend to even out.

REICH: A lot of employers are afraid about this ahead of time 'cause they know they can't raise their price when their competitors do not. But here you have a policy that affects all the restaurants, simultaneously.

SIEGLER: Before I showed up, Reich crunched his latest numbers for restaurants in San Jose. Across the board he found that operating costs rose by about .25 percent in the past year. And prices for customers rose a little under 1 percent, on average. Reich says there's one big caveat here - the economy in San Jose, in the Silicon Valley, is incredibly strong.

REICH: It's easier to have higher minimum wages in areas that are booming than in areas that are falling apart economically.

SIEGLER: Then again, Reich points to Albuquerque, New Mexico, a city with an economy that's long struggled. He says a minimum wage hike there appears to have had little effect on businesses so far. One things for sure, economists like Reich are about to get a lot more data to study. Dozens of cities and counties are now considering joining San Jose, Seattle and others in increasing their local minimum wage. Kirk Siegler, NPR News. Transcript provided by NPR, Copyright NPR.